Rethink, redefine and reform business interruption insurance cover
By Josef Kefas Sheehama.
It is anticipated that insurers themselves will have some part to play in terms of a shift in insurance risk. This will give immediate need for policy coverage reviews including insuring clauses, type of insurance coverage and exclusions.
Business interruption insurance exists to help a business get back on its feet after an unforeseen event. It’s a crucial survival tactic as it insures a business against loss of revenue and helps it to continue to pay overheads and expenses during a period of downtime.
The outbreak of the COVID-19 pandemic has no doubt, occasioned an unprecedented human and economic crisis. Business interruption insurance is designed to compensate the business for the financial impact of the interruption or interference as a result of the insured suffering physical damage to the insured property or other key external events or own operations that prevent the normal business operations from continuing and generating revenue.
The resultant lockdown and abrupt shutdown of major economic activities have given rise to several business disruptions and economic losses.
It is very interesting to witness the evolution of business interruption coverage and how courts seem to be broadening their interpretation of these policies as more and more non-physical property losses become prevalent, such as pandemics and cyber-related claims. Therefore, reform is critical as more and more businesses come to realize that these types of losses pose a serious threat to their operations and contingency planning. Inevitably, the insurance industry will increasingly be called upon to rethink and redefine products.
Yet despite its importance to business continuity and the ability to fully recover from a major loss event, business interruption insurance is largely misunderstood and as a result, the sums insured are often wholly insufficient to cover a catastrophic loss and the increased costs of working during the recovery period.
Business Interruption comes in many guises which can make it difficult to navigate for those with little understanding of how different policies apply to different areas of a business. When it comes to calculating how much business interruption cover is needed, basing numbers solely on the previous years’ earnings is unlikely to be sufficient as it does not take account of any potential growth the business may achieve during the course of the policy. If there are plans to expand the business, this needs to be reflected in the BI calculations. It may be necessary to insure gross profit or revenue, depending on which is more appropriate.
Another key consideration when calculating BI cover is the maximum indemnity period, which is the period of time for which the insurance policy will cover any income losses arising from an insured incident. It’s also important to consider not just how long it will take to start operating again, but also how long it will take for sales to return to pre-incident levels. Repairing buildings and replacing machinery and stock is one thing, but replacing lost customers and building up the business again can take significantly longer.
Namibia’s insurance sector is still relatively underdeveloped compared to its peers. The lack of a definite and comprehensive legal regulatory framework in the insurance industry is thus not unconnected to the dearth of BI insurance in Namibia. There is no clear provision for the practice of BI insurance which constitutes one of the main reasons why this type of policy is not popular in the Namibian insurance industry. It is offered by only a few insurance companies.
More importantly, the proliferation of cyber attacks has also added new urgency and dimension to BI. Cyber attacks can now cause electric outages, shut down assembly lines, block customers from placing orders, and break the equipment which business rely on to run the business.
Being prepared enables businesses to keep running during natural disasters, and cyber or reputational crisis. While insurance can cover some of the property and operational losses, it cannot make up for the loss of market share, reputational damage, decline in investor confidence, or a decline in the share price caused by an interruption.
In a world of growing complexity and the interrelated nature of risks, no company can rest on its laurels in terms of its Business Interruption recovery strategy. Continuity plans should always be ongoing works of improvement and constant risk mitigation. Everyone in the business should be asking what the worst-case scenario could be, and as a business, how to respond to it. Therefore, a fortified and robust business continuity plan will boost a company’s resilience in the event of a Business Interruption.
Finally, it is certain that the COVID 19 will, without a doubt, trigger litigation, insurance claims and coverage disputes now and beyond. The economic effect of the COVID-19 pandemic has shown how pivotal business interruption insurance is to every business organization and every financial system. It helps to financially protect companies in the event of a serious incident such as the prevalent pandemic, which could consequentially lead to abrupt termination of some businesses.
There is no doubt that many businesses in Namibia may not be able to continue their operations as a result of the orders made to contain the spread of the COVID-19 pandemic. While many businesses are quick to arrange their business insurance which covers their property and contents, business interruption insurance is often overlooked, especially in Namibia. Ultimately, Business Interruption insurance may be the only element that salvages some businesses from the economic fallout of the pandemic.